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6 - Theoretical Benefits and Detriments of Dual-Class Stock

from Part II - Evaluating Dual-Class Stock

Published online by Cambridge University Press:  29 October 2021

Bobby V. Reddy
Affiliation:
University of Cambridge
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Summary

The disproportionately low level of equity owned by controllers of dual-class firms can incentivise various behaviours in the way that they manage, or cause to be managed, their firms.With controllers feeling less of the consequences from their actions, controllers may be incentivised to ‘tunnel’ profits from the company, pay themselves high executive remuneration, cause the company to take decisions primarily in the pecuniary or non-pecuniary interests of the controller rather than in the interests of shareholder wealth, pass control to unsuitable heirs, block lucrative takeovers and, when takeovers do occur, extract control premia.Management is entrenched, meaning that when controllers take such actions, the public shareholders cannot change the management team.However, controller benefits may not just harm public shareholders, and certain controller benefits can incentivise actions that are neutral or beneficial to shareholder wealth, such as profitable related-party transactions, the bonding of a visionary founder to the firm, maximising takeover value, taking a long-term approach and risk-taking.A dual-class stock tradeoff exists, and if legal regulatory and market constraints can limit the extraction of pernicious controller benefits so that they are outweighed by benign controller benefits, the structure can be net beneficial for controllers and public shareholders alike.

Type
Chapter
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Founders without Limits
Dual-Class Stock and the Premium Tier of the London Stock Exchange
, pp. 188 - 248
Publisher: Cambridge University Press
Print publication year: 2021

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